Let’s start here with an analysis of the total credit to the Brazilian housing sector (see below). The housing sector credit in Brazil refers to the credit granted for the acquisition of residential properties (like home mortgages in the US).

By looking at the graph above, one can conclude that the strong credit growth (in absolute numbers) in Brazil started in 2005. Everything ok there, right?

However, consider this next chart showing the annual growth rate of credit to the housing sector.

According to Leandro Roque, the chart above paints a far more interesting story. In addition to confirming that the expansion of real estate credit started to inflate in 2005, it shows that the acceleration trend has stalled in early 2011, followed by a deceleration in the second half of that year.

According to the Austrian school of economics, the Brazilian real estate industry started its stagnation phase in early 2011. After all, this school of thought says that it’s not necessary to have a credit contraction (which is far from happening in Brazil given that it continues to grow over 40% per year) to deflate a bubble, as long as the credit growth rate decelerates (which is exactly what is happening). Housing credit growth fell from 54% to 40%. It is worth noting that, until now, there had never been any contraction since 2003.

When direct credit (“credito direcionado”) to properties stopped accelerating, the basis for the continuous rise in prices were removed. The reduction in this credit expansion has meant a slowdown in demand for real estate, because a major component of the demand for housing lies within the funds generated by credit expansion. A decline in this component generated an equivalent decline in the general demand for real estate. The decline in demand for real estate was obviously followed by a decline in real estate prices.

Property prices have fallen, but this is a fact that is being very cleverly hidden by the Brazilian media and home builders. For example, instead of stating that they are no longer able to sell for those former high prices, builders prefer to say that they are “doing deals” or “offering discounts and promotions.” But remember, there are no discounts on a genuinely hot market. There is only price drop, period.

When the sector credit was flowing rapidly, starting in 2008 and consolidated in 2010, several builders cheered with the prospect of easy money, hence they borrowed and launched projects. Now, however, with the slowdown in credit for the purchase of real estate, such earnings prospects are no longer being met, and several construction companies are facing difficulties in their balance sheets. Just look at the share prices of the main real estate companies listed on Bovespa (Rossi Residencial, PDG Realty, Brookfield and Gafisa) – they are near their historical minimum.